The July natural gas wholesale exchange contract jumped to a 10-month high after the U.S. posted a smaller-than-expected increase in the amount of the natural gas in storage, relieving some pressure on a well-supplied market. The heat wave that hit the East Coast, Southeast and Gulf Coast regions last week spurred widespread use of air conditioning for the first time this year, resulting in increased electricity demand. While this seasonal shift was expected, market participants underestimated how much natural gas was used in electricity generation, as many nuclear power plants are down for maintenance. While yesterday in Houston, we broke the 100 degree mark and it’s not even summer yet. One other point to note is that New York State is suing the Federal Government in an effort to require a review of fracking before it is approved in the Delaware River Basin. Based on published information, you can make strong arguments for and against fracking so as this topic heats up it should be interesting to see how it plays out.
The reason that yesterday’s EIA storage report was such a large surprise was primarily attributed to the amount of natural gas to coal switching in the industry. According to a report published yesterday by Tudor Pickering Holt, they indicate that natural gas and coal prices will remain aligned at the hip through 2012, potentially prompting fuel-switching in the power-generation sector close to 3 Bcf/d. They also state that, “switching is here to stay as long as coal/gas prices remain near parity for power generation on a $/MWh basis," TPH said. "If prices for gas fall relative to coal, more switching will occur, increasing demand and supporting gas prices." But if gas prices were to rebound above $5.00/MMBtu or above, generators would likely move back to coal, the report indicated. The report also stated that fuel-switching "does not literally mean a switch is flipped at a dual coal/gas power plant and the input fuel used is immediately changed. The key to natural gas to coal switching is more geographic in nature with the location of each power plant and by each plant's relative variable cost of production." The study indicated three main factors pushing coal to gas-fired generation into direct competition: 1/ Overabundance of gas-fired capacity stemming from a rush of new builds which commenced sometime in the early 2000’s, 2/ Inexpensive methods drilling for natural gas in the shale arena of the natural gas business. 3/ The high cost of Eastern coal which is primarily mined in the Appalachia area in addition to the backdrop of environmental concerns due to coal such as the toxicity levels in the atmosphere.
This week the Electric Reliability Council of Texas, which operates the power grid for the state’s deregulated market, said it expects the state will have plenty of power to meet peak electricity demand this summer. That’s reassuring after a colder-than-expected winter produced rolling blackouts in February. ERCOT’s annual summer assessment, though, assumes that electricity demand will fall this summer from last year’s record. ERCOT now says it should have plenty of reserve cushion to meet that demand, although an assessment earlier in the year raised concerns about Ercot’s ability to meet demand over the longer term. In its latest assessment, ERCOT predicts that sluggish employment growth and long-term average temperature forecasts should ensure its reserve cushion is now adequate through 2013. That seems to raise two concerns for folks in that they believe that the economic recovery, such as it is, is proving to be a jobless one. While employment gains have lagged other economic indicators, which could mean we see greater electricity demand despite the lack of hiring. The bigger concern though is the temperature forecast.
The Chronicle’s SciGuy has analyzed three long term forecasts this summer and found a consensus that calls for a hotter-than-normal season in Texas, which would seem to contradict ERCOT’s predictions. So the question is whose forecast is most accurate. All of these numbers are rather interesting, but the concern for electricity customers is that ERCOT may simply be tweaking its demand forecast to make the reserve cushion appear bigger than it is. If that’s the case, Ercot could face a repeat of last February’s blackouts during the searing heat of an above-average Texas summer which has already started with yesterday’s 100 degree temperature in Houston.